2H23 results are largely in line with forecasts and our expectations
The company announced its 2023 results: full year revenue of HK$5.266 billion, up 15% year over year; net profit of HK$73.05 million, which is largely in line with previous forecasts and our expectations; non-IFRS net profit of HK$115 million (loss of HK$406 million in 2022). Of this, 2H23 had revenue of HK$2,767 million, up 31% year over year; non-IFRS net profit of HK$449 million (2H22 was a loss of HK$301 million).
Development trends
2H23's revenue grew rapidly, and the contribution of new games and apps such as “Doomsday” increased, and “Kingdom Era” was relatively steady. In terms of games: 1) “Doomsday: Last Survivors” earned HK$429 million, and “Viking Rise” earned HK$286 million, contributing a total of HK$714 million, accounting for 26% of the company's revenue, with significant increases from year to month, making a major incremental contribution to the 2H23 game business. 2) The flagship product “Kingdom Era” 2H23 achieved revenue of HK$1.45 billion, down 13% month-on-month; MAU remained at the level of 9 million in 2023, down from 11 million at the end of 2022. In terms of the app business, 2H23 achieved revenue of HK$391 million, up 585%/107% month-on-month respectively, accounting for 14% of the company's revenue; by the end of 2023, the APP business MAU had about 9.5 million people. We believe that with the continuous operation of “Doomsday” and “Viking Rise” and breakthroughs in the app business, the company's revenue has grown rapidly and the structure has diversified.
AI applications have boosted cost reduction and efficiency, and the company said it has achieved a monthly profit. We believe that the company's sales expenses were driven by demand for product promotion. 2H23 increased 30% year over year to HK$1,145 million, but the sales expenses ratio was well controlled and remained flat at 41.4% year on year. R&D and management expenses were optimized. 2H23 decreased 23%/5% year over year to HK$434/158 million, respectively, and the cost ratio decreased 11/2ppt to 15.7%/5.7% year over year.
The company said that the application of AIGC has driven the company to reduce costs and increase efficiency and release profits; in November 2023, the company achieved break-even in 2023, and the company has achieved monthly profits since December 2023.
The monthly turnover performance of key products in 2024 is improving, and we are concerned about the continued release of profits under a diversified revenue structure. The company said that the 2024 “Kingdom Era” plan will continue to promote stable distribution while maintaining profit contributions; “Doomsday” will achieve monthly turnover of HK$100 million in March 2024 after increasing promotion; “Rise” plans to start a faster growth model in 2H24; the app business focuses on news and information, and the company estimates that it may achieve a turnover of 8 million US dollars in March 2024. The company stated that its goal for 2024 is “profit and growth”. We believe that profits from the company's flagship products will continue to be released, while key new game and app businesses will gradually enter the profit release cycle. It is recommended to pay attention to the company's subsequent profit performance.
Profit forecasting and valuation
In view of the continued release of the company's product profits, the 2024/25 non-IFRS net profit was raised by 13%/5% to HK$49/550 million. The current share price corresponds to 9/8 times 2024/25 non-IFRS P/E. Maintaining a neutral rating, the target price was raised 15% to HK$4.16, corresponding 10/8 times 2024/25 non-IFRSP/e, with an upward margin of 16.5%.
risks
New tourism and new business performance fell short of expectations, flow of main products declined, spending was higher than expected, geopolitical and regulatory risks, and macroeconomic pressure.